Automated Market Makers Explained with Just In Time Liquidity Provision in Core DeFi

Automated Market Makers and the Shift Toward Just‑in‑Time Liquidity

Decentralized finance (DeFi) has built a complex web of protocols that let users trade, lend, borrow, and earn without relying on central intermediaries. One of the most transformative building blocks of this ecosystem is the Automated Market Maker (AMM). AMMs replace traditional order books with mathematical formulas that set prices and enable instantaneous swaps. In recent years, a refinement called [Just‑in‑Time (JIT) liquidity provision](/post/y* therefore dictates the price.

Because the formula is deterministic and executed on chain, the AMM automatically maintains a market without the need for a centralized order book or market makers. The price adjusts dynamically based on supply and demand.

Liquidity Provision in AMMs

Liquidity providers (LPs) are the lifeblood of an AMM. By depositing equal value of both tokens into the pool, LPs create the reserves that enable swaps. In return, they earn a portion of the trading fees generated each time the pool is used. The fee schedule is set by protocol parameters; for example, Uniswap v3 charges a 0.3 % fee on each trade, which is split proportionally among LPs based on their share of the total liquidity.

Why LPs Matter

1. Price Discovery – The CPMM formula ensures that each trade nudges the price toward the relative value of the two tokens. More liquidity makes price changes smoother.
2. Capital Efficiency – With LPs, the same capital can be used across multiple protocols and use cases, such as automated yield farming.
3. Risk Distribution – LPs share the risk of price slippage and impermanent loss, rather than it being borne by a single trader.

Impermanent Loss

Impermanent loss (IL) occurs when the ratio of the two tokens in a pool diverges from the ratio at the time of deposit. Suppose an LP deposits 1 ETH and 2000 USDC. If ETH rallies and its price doubles relative to USDC, the pool will contain more ETH and less USDC. The LP’s combined holdings (in USDC terms) will be worth less than if they had simply held the tokens outside the pool. IL is “impermanent” because it can reverse if the price ratio returns to its original state, but it is a real cost that discourages LPs from providing liquidity to volatile pairs.

Introducing Just‑in‑Time (JIT) Liquidity Provision

Traditional LP models require liquidity to be locked in the pool for an indeterminate period. JIT liquidity flips this paradigm by allowing traders to inject liquidity only for the duration of their trade. The liquidity is automatically removed once the trade is executed, freeing the capital for other uses.

How JIT Works

1. Trader Signals a Trade – A trader sends a request to the AMM, specifying the amount of token A they want to swap for token B, along with a liquidity pool selector (e.g., a Uniswap v3 pool with a particular fee tier).
2. Liquidity Provider Renders a Quote – An LP or a group of LPs submits a quote that satisfies the trade, indicating how much liquidity they are willing to provide temporarily. This quote is signed by the LPs and includes a time‑bound validity window.
3. Trade Execution – The AMM pulls the liquidity from the LP’s wallet, executes the swap using the CPMM formula, and returns the resulting token B to the trader.
4. Liquidity Reclamation – Immediately after the trade, the temporary liquidity is returned to the LP’s wallet, minus any earned fees.

Because the liquidity is only needed for the instant the trade occurs, LPs avoid IL. Their capital can be deployed elsewhere in the meantime, maximizing yield.

JIT versus Traditional Liquidity Provision

Real‑World JIT Implementations

Several protocols have pioneered JIT liquidity in production. Two notable examples are:

1. Perpetual Protocol’s JIT Liquidity

Perpetual Protocol uses a perpetual swap model that includes a JIT liquidity feature. Traders can request a trade that pulls temporary liquidity from a pool of LPs. Because perpetual swaps have no expiration, the JIT mechanism keeps capital fluid while still offering tight spreads.

2. Dodo’s “JIT” in Uniswap v3 Integration

Dodo integrated a JIT system on top of Uniswap v3 pools. Their implementation uses a flash‑loan‑like approach where liquidity is borrowed for the trade and immediately repaid. LPs receive a fee for providing the temporary liquidity, and traders enjoy lower slippage.

These examples illustrate that JIT can coexist with existing AMM infrastructures, adding a layer of flexibility without altering the core price‑setting mechanism.

Technical Deep Dive: Building a JIT Module

Below is a high‑level pseudo‑code outline of how a JIT module might be constructed. This is not production‑ready code but serves to illustrate the sequence.

// SPDX-License-Identifier: MIT
pragma solidity ^0.8.17;

interface IUniswapV3Pool {
    function swap(
        address recipient,
        bool zeroForOne,
        int256 amountSpecified,
        uint160 sqrtPriceLimitX96,
        bytes calldata data
    ) external returns (int256 amount0Out, int256 amount1Out);
}

interface ILiquidityProvider {
    function provideLiquidity(
        address pool,
        uint256 amountToken0,
        uint256 amountToken1
    ) external returns (bytes32 commitmentId);

    function reclaimLiquidity(bytes32 commitmentId) external;
}

contract JITLiquidityRouter {
    ILiquidityProvider public lp;
    IUniswapV3Pool public pool;

    // Trader initiates a trade
    function tradeWithJIT(
        address trader,
        uint256 amountIn,
        bool isToken0In,
        uint256 feePercentage
    ) external {
        // 1. LP provides liquidity
        bytes32 commitId = lp.provideLiquidity(
            address(pool),
            isToken0In ? amountIn : 0,
            isToken0In ? 0 : amountIn
        );

        // 2. Execute swap
        int256 amountOut = pool.swap(
            trader,
            isToken0In,
            isToken0In ? int256(amountIn) : -int256(amountIn),
            0, // no price limit
            abi.encode(commitId)
        );

        // 3. Reclaim liquidity
        lp.reclaimLiquidity(commitId);
    }
}

Key points:

• Atomicity: The swap and liquidity reclaim are performed within the same transaction, ensuring no slippage for the trader.
• Fee Collection: The LP’s fee can be transferred in the same transaction or stored in the contract for later withdrawal.
• Security: The router must verify that the LP actually holds the provided amounts and that the commitment is valid.

Benefits of JIT Liquidity

1. Lower Impermanent Loss Exposure

Because LP capital is not locked in the pool, it is not subject to price divergence between the two assets. Impermanent loss is effectively eliminated for the duration of the trade.

2. Higher Capital Utilization

LPs can reallocate their capital between multiple protocols. For example, a yield‑optimizing strategy might move liquidity from a volatile pair to a stable‑coin pair, then back again, maximizing annualized returns.

3. Enhanced Market Liquidity

JIT can bring more liquidity to the AMM during periods of high trading volume. LPs can respond to real‑time market demand without long‑term commitment, leading to tighter spreads.

4. Lower Barrier to Entry

Traders who wish to provide liquidity on a short‑term basis can do so without locking large sums. This democratizes participation and can attract new liquidity sources, especially from institutional players who prefer to keep capital liquid.

Risks and Challenges

While JIT offers many advantages, it is not without pitfalls.

1. Front‑Running and Miner Extractable Value (MEV)

Because the trade is executed atomically, there is still a window where front‑running bots can intercept the transaction. Some protocols mitigate this by adding a random delay or using commit‑reveal schemes.

2. Complexity of Implementation

Developers need to manage commitments, time‑bound approvals, and secure token transfers. Bugs can expose LPs or traders to loss.

3. Liquidity Availability

During extreme market events, LPs may not be willing or able to provide the required temporary liquidity. This could lead to failed trades or increased slippage.

4. Regulatory Considerations

If a protocol is designed to route liquidity between multiple LPs, there may be legal scrutiny around the classification of the service and potential licensing requirements.

Use Cases for JIT Liquidity

1. High‑Frequency Trading (HFT) – Traders who execute large volumes of swaps can benefit from JIT by minimizing IL while still receiving the tight spreads offered by AMMs.
2. Yield Farming Strategies – Automated bots can move capital between AMM pools to capture fee income while keeping funds liquid for other opportunities.
3. Cross‑Chain Swaps – Protocols that bridge assets across chains can use JIT to provide liquidity on each side of the bridge only when a swap is requested, reducing risk exposure.
4. Decentralized Exchanges (DEX) Liquidity Provision – DEX platforms can incorporate JIT to allow liquidity providers to contribute to multiple markets simultaneously.

Future Outlook: Evolving AMM Ecosystems

The AMM space is rapidly innovating. Some trends that will likely influence JIT and related concepts include:

• Composable AMMs – Protocols that allow AMMs to be nested or chained, creating complex liquidity routing paths.
• Dynamic Fee Models – Instead of fixed fee tiers, AMMs might adjust fees in real time based on volatility, liquidity depth, or market sentiment.
• Layer‑2 Scaling – Using rollups or sidechains to reduce gas costs, making JIT trades cheaper and more efficient.
• Integration with Synthetic Assets – Providing JIT liquidity for synthetic token pairs can broaden market exposure and reduce slippage for derivative products.

These developments will further blur the lines between traditional liquidity provision and on‑demand, flash‑loan‑style liquidity, potentially making JIT the default approach in many AMM protocols.

Practical Tips for Traders and LPs

For Traders

1. Choose the Right Pool – Verify that the pool supports JIT or has a compatible router.
2. Monitor Fees – JIT trades may incur additional protocol fees; compare them to traditional swaps.
3. Check Liquidity Depth – Even with JIT, a thin pool can lead to slippage. Use on‑chain data to gauge depth before committing.

For Liquidity Providers

1. Set Appropriate Commitment Parameters – Decide on maximum exposure, time windows, and fee rates that reflect your risk appetite.
2. Use Rebalancing Tools – Automated bots can help maintain optimal liquidity levels across multiple pools.
3. Audit Smart Contracts – Before delegating capital, ensure the JIT router and commitment contracts are audited and have robust security mechanisms.

Conclusion

Automated Market Makers have reshaped decentralized trading by offering instant swaps without order books. Just‑in‑Time liquidity provision refines this model by allowing liquidity to flow only when needed, eliminating impermanent loss and boosting capital efficiency. Real‑world protocols like Perpetual and Dodo have already validated the viability of JIT, and the underlying architecture can be adapted to various AMM standards.

While challenges such as front‑running, implementation complexity, and liquidity availability remain, the benefits—lower risk, higher returns, and democratized participation—make JIT a compelling innovation. As DeFi continues to mature, we can expect more protocols to adopt JIT or similar on‑demand liquidity mechanisms, further enhancing the resilience and accessibility of decentralized markets.